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The Ultimate Gold Bubble Test

By Brian Hunt, Editor in Chief, Stansberry Research
Thursday, November 12, 2009

In the past three months, there's been a very popular – and very wrong – thing to say about owning gold.

I hear it a lot from inexperienced Wall Street analysts, bloggers, and money managers who spend little time living in the "real world."

Here's what they're saying: "Gold is way too popular now... It's near the end of its bull market." The recommended "action to take" is to cash in your gold profits and move on to something different.

I can tell you that taking this advice is a big mistake. Anyone who believes gold is too popular with the mainstream public simply doesn't know who the mainstream public is... and they don't understand how bull markets end.

Sure... gold is up big since it broke out to a new high in September. In just over two months, it has climbed from $950 an ounce to $1,100 an ounce.

Gold is also enjoying a lot of mainstream press these days. Six years ago, when I would tell someone I was placing a significant portion of my net worth in gold, they'd look at me like I was crazy. Now, they nod and say, "I heard something about gold the other day on TV."

That's as far as the average Joe goes with his interest in gold. This is why gold is nowhere near a "blow off" top. Two days ago, at the Stansberry & Associates Alliance Conference, I showed folks how to perform the ultimate test of whether an asset is "too popular" or "in a bubble." Here it is:

Ask 100 people on the street if they own gold. See what they say.

Don't ask folks who read newsletter writers like Doug Casey or Porter Stansberry. Don't ask folks who you regularly talk investments with. Ask randomly chosen members of the public if they know why gold is "real money." Why gold has climbed from $650 to $1,100 in the last three years.

I guarantee you the average person on the street is going to look at you like you asked him which airline offers nonstop flights to Venus.

He's going to have no idea what you are talking about. He's heard about gold on the news a few times, but he can't tell you why gold is rising, who is buying it, or why it is the best form of money mankind has ever found.

Gold is divisible, portable, lasting, consistent the world 'round, useful in industry... and as master speculator Doug Casey reminds us, gold cannot be created out of thin air by a government. In other words, you actually have to work and save in order to build a gold hoard. You can't "Bernanke" your way to real gold wealth.

The people who realize this – like billionaire hedge-fund manager John Paulson and super investor Chris Weber – are getting more publicity now than they were six years ago. But it's nowhere near enough publicity for a seasoned investor to say, "Gold is too popular."

When a bull market gets too popular, it looks like tech stocks did back in 1999. This was when everybody and his brother bragged at the office Christmas party about making a fortune in Cisco or Microsoft. It was when schoolteachers, personal trainers, and cab drivers suddenly became tech stock experts. Folks knew what "bandwidth," "routers," and "e-commerce" meant. Only when an asset enjoys that sort of widespread attention can you say it's too popular.

I can't say that about gold right now... not after talking with friends who do not invest... not after talking with the people sitting next to me on the plane. The public still has no idea what "bullion" really is... or how the government's reckless "tax and spend" behavior is clobbering our currency.

Don't believe me? Just ask 'em.

There could come a time when almost everyone you know is trading gold stocks like they did tech stocks in 1999... or discussing the virtues of gold as a form of savings. But few people do this now.

Which means that, while the gold market may be overbought in the very short term, the real, long-term move in gold has much farther to run.

Good investing,

Brian Hunt

P.S. If you're new to buying or storing physical gold, I urge you to read an interview our sister website The Daily Crux recently did with gold expert Jeff Clark of Casey Research. There's tons of useful stuff in the interview on where to buy gold, who you can buy it from, and the best and safest ways to store it. You can read the interview free of charge. Learn how to access it immediately here.

Market Notes


Today, we consider one of the great investment questions of our time... and ask for a little help from Dr. Copper

Longtime DailyWealth readers know we keep close tabs on copper. The red metal is a vital ingredient in everything around you... like power lines, homes, plumbing, cars, and refrigerators. This "in everything" quality makes the copper price an instant read on the global economy.

The great question we consider is, Are we going to slip into a slog of lower economic demand and lower prices? Or is the government going to set off an inflationary explosion with its giant "funny money" program?

We have our guess (the latter), but we always mind what the market says... which brings us to today's chart. It displays the incredible 85% rebound in copper prices in 2009. This rebound halted in August, and copper has drifted around $3 per pound since. Its next big move is key...

If the market breaks below summer lows of $2.20 per pound, it would be a loud warning we're entering a period of lower demand, lower incomes, and lower asset prices. A rise above $3.25 would be a loud warning – a shotgun fired next to your ear – that funny-money inflation is becoming a problem. Keep a close eye on the doctor...

Copper's next big move answers the million-dollar question

In The Daily Crux

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